Tuesday, June 4, 2013

It may be an under-appreciated fact, but car and truck sales have enjoyed a rather spectacular recovery in the past four years.

Although they haven't made new highs for six months, total vehicle sales in the U.S. have risen at a 13.2% annualized pace since hitting bottom in early 2009. That's over four years of double-digit gains.

Domestic light truck sales have done even better, rising at a 16.1% annualized pace over the same period, and now at a new post-recession high.

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Despite surging prices for homes and equities, consumer spending is contracting, registering its biggest monthly decline since September 2009. Quite simply, the wealth effect is rendered moot by languishing incomes.

No wonder yoy U.S. import growth has also plunged into negative territory, whether or not oil imports are included. In recent decades, this has happened only during U.S. recessions. Notably, unlike data for GDP and jobs, imports data are not revised substantially, long after the fact.

Some are surprised that inflation has failed to take off despite massive amounts of quantitative easing. The explanation is simple: recession kills inflation.

As a result, core inflation – defined as yoy growth in the Personal Consumption Expenditure (PCE) deflator excluding food and energy – has now dropped under 1.1%, to the lowest reading in its entire 53-year record.

Meanwhile, yoy growth in the headline PCE deflator has dropped to 0.7%, its lowest reading since October 2009, and far below the Fed's official 2.0% target. This inflation measure has never been this low except during or in the immediate aftermath of recession.

The bottom line: for all the talk of the wealth effect, demand is falling and deflation is closer than at any time since 2009."